UK recovery threatened by weak productivity

Productivity levels of British workers have been slower to recover from the
last recession than any of the previous 13 downturns, according to a study
by the Bank of England, raising questions about the underlying state of the
economy.

Productivity among British manufacturers has been weaker than rival countries but is still better than the UK service sector

The problem has been particularly acute in the UK, where output per worker remains further below pre-crisis levels than in other leading economies. The weakness “is at odds with historical experiences”, the Bank said in its Quarterly Bulletin. “On average labour productivity was about 10pc above its pre-crisis level at this point.”

Economists have found Britain’s poor productivity one of the most puzzling conundrums of the recovery. Weak productivity would suggest that companies can cut jobs, but businesses claim to be operating at close to maximum capacity – suggesting they need to hire.

The output figures have been so “persistently weak”, the Bank said, that “it is hard to ignore the possibility that underlying productivity may have slowed” – suggesting potential growth has been permanently lost and the recovery will take even longer bed in.

The Bank’s study suggests that the UK has lost more potential output than many leading economies, including the US, Germany, France, Spain, Italy and Norway. The other side of weak productivity, though, has been relatively low joblessness. UK unemployment is just 8.2pc, relatively low for the aftermath of such a deep recession. In Spain, where productivity has soared, it is 25pc.

Before the crisis, Britain’s productivity was strong – rising by an average of 2.4pc a year. Since 2009, though, it has managed just 0.5pc annually and has dropped further behind rival countries which have either “returned to their pre-crisis average growth rates [or] begun to catch up”.

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The bulk of the problem has been in Britain’s powerhouse services sector, which accounts for three quarters of economic output. UK manufacturing, though, has also performed poorly compared with rivals.

“It is difficult to explain this weakness as a cyclical pattern: the fall in services output was greater here than elsewhere, which might otherwise have suggested a stronger recovery,” the Bank said.

“It is possible that the financial nature of the crisis has reduced underlying labour productivity in business and financial services. But the challenge to this view is why such weakness is not evident in the US, where the financial crisis originated and business services is just as big as in the UK.”

The conflicting signals have made it hard for Bank policymakers to establish the future path of inflation and, therefore, interest rates. Peak employment would suggest inflationary pressures are building, while weak productivity tends to point to a fall.

The Telegraph Investor

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